Extend TRIA to protect our economic security

The Terrorism Risk Insurance Act, or TRIA, is critical to our nation’s economic security. Unless Congress acts again, it will expire at the end of 2007. As chairman of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, I am working closely with Congressman Michael Capuano (D-Mass.) and others on the Financial Services Committee to craft a bipartisan extension.

Congress designed TRIA as a temporary backstop to get our nation through a period of uncertainty until the private sector could develop the models to price for terrorism reinsurance. Congress should extend TRIA for a second time because despite the success of the original TRIA and the 2005 reauthorization, the marketplace for terrorism insurance remains fragile.

Specifically, commercial property owners, developers, and their lenders have all testified before the Capital Markets Subcommittee about the prospect of not getting the insurance needed to protect their property, comply with mortgage covenants, or obtain project financing without TRIA. We, in short, need TRIA to protect the security of the financial and commercial sectors of our economy.

TRIA, however, should remain a temporary program. The duration of an extension will require us to maintain a delicate balance. We must find a length of time that is long enough to provide greater certainty to the marketplace and short enough to encourage the private sector to develop its own solutions to the problems posed by conventional terrorism.

The insurance industry has developed sophisticated models to determine the risk of and price for many types of losses. My hope is that this second TRIA extension will allow the industry the time it needs to develop the products needed to deal with this new risk.

Terrorism is, unfortunately, also a long-term problem. We therefore need a long-term solution, which the insurance industry is best suited to find and manage. By creating a commission with both private and government members in this TRIA extension, we can collaborate to identify permanent solutions to the problems we face.

Congress should also use this TRIA reauthorization to enact needed reforms to the program. Two important changes are the addition of group life insurance and the elimination of any distinction between foreign and domestic terrorist events.

The inclusion of group life insurance in this TRIA extension will correct a fundamental shortcoming in the current program: The federal government should provide protection for lives lost in a terrorist event and not just the buildings where people work.

TRIA also ought to cover all terrorist events, both foreign and domestic. Regardless of the perpetrator or motivation, any terrorist event threatens the stability of our government and has the same effect on those attacked.

Furthermore, we should use this legislative debate to better address nuclear, biological, chemical and radioactive (NBCR) terrorist threats. TRIA has greatly increased the availability of insurance for conventional terrorism events, but NBCR coverage is generally not widely available under the current program. Many would like to fix this shortcoming now.

It seems highly unlikely that a solely private market solution to this problem will emerge in the near future. Because of the potential size of their losses, reinsurers and insurers alike are currently reluctant to insure NBCR events.

Moreover, it is extremely difficult to estimate the probable losses caused by an NBCR attack with any certainty. Nevertheless, the American Academy of Actuaries has estimated that losses for a large NBCR event in a densely populated area could cause more than $600 billion in claims for TRIA-covered lines.

It would be impossible for private industry, given its limited reserves, to cover all losses under NBCR scenarios like this one. Furthermore, TRIA’s high trigger levels and insurer deductibles already threaten the solvency of many companies and, therefore, their ability to pay claims after a conventional terrorism event, let alone an NBCR attack.

Additionally, a purely governmental solution is not ideal. If the government assumed all of the burdens for paying claims after an NBCR attack, it could increase federal outlays by more than a quarter of our nation’s budget under some estimates. It would also take away the efficient distribution streams of the private sector and undermine existing incentives put in place to safeguard, prevent, or limit the impact of such events.

The federal government and the insurance industry, as a result, likely will need to partner to find a way to plan for an NBCR crisis, rather than handle such a significant problem for our nation during a time of great uncertainty and potential chaos.

In sum, TRIA is an important program that provides economic stability. Until the private market can develop solutions for a long-term fix, the federal government must not walk away from its responsibility to provide security to our nation. Congress must expeditiously renew TRIA with some reforms, and for a limited time, before it expires at the end of 2007.

Kanjorski is the chairman of the Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.

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